Telemus Weekly Market Review October 10th - October 14th, 2022
We regularly talk to investors that specialize in specific parts of the market. Given greater movements in the market over the last couple months, we’ve been even more proactive in conversations of late. The overarching theme of our discussions is that while asset prices have compressed lower, what we are starting to see is greater emergence of mispricing of assets. Some of these mispricings might indicate some prices have further to fall. However, we are starting to see a unique environment emerge where asset price dispersions are widening.
As is often the case in market selloffs, stocks tend to depreciate in tandem. Sure, some sectors may hold up better than others, but generally there is limited variation in moves. Thus far in 2022, we’ve seen higher growth stocks sell off more than the rest of the market. This is understandable as these stocks carried considerably higher valuations than average. As the year has played out the combination of higher interest rates and slowing economic growth has resulted in these securities becoming less attractive. What we have yet to see are stocks that are priced at below average valuations revert toward market averages. We see this opportunity as a positive indicator for value stocks over the intermediate term.
We are also beginning to see a divergence between public and private market assets. Private market returns don’t get repriced on a daily basis and thus during swift moves in the market, their pricing tends to lag. At this point we are starting to see some public securities trade at significant discounts to comparable assets in the private market. For example, publicly traded real estate stocks have fallen with the market, a greater amount than what has occurred in private markets.
Within debt markets, the syndicated loan market has been caught in some dislocation as banks are struggling to sell inventory. Syndicated loans are loans originated by banks that they intend to sell to investors. These loans are comparable to high yield bonds both in terms of credit quality as well as yield. Some recent syndicated deals have not garnered sufficient investor interest based on the terms and yields offered. As such, banks are currently sitting on this inventory given they don’t want to lower the prices and take a write down in order move loans. This serves as an example of where prices may not yet have fallen in line with market expectations around economic fundamentals.
While bear markets are challenging to endure, they tend to create outsized investment opportunities along the way. These investments carry risk and often involve accepting elevated volatility. After an initial draining of asset prices in 2022, dislocations are beginning to emerge. Not all of those are positive, such as what banks are experiencing in the syndicated loan market today. However, patient investors that have the discipline to wait until opportunities with disproportionate return potential present themselves can derive added long-term returns from market environments like we are experiencing. Now that we are seeing more of these opportunities arise, we believe it will be an even more interesting, yet volatile, time for long-term investors.
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